Do retirees really need $300,000 for health care? Probably not

A popular estimate of retiree health care costs may be misleading, if a new study is accurate.

For more than two decades, Fidelity Investments has published an annual estimate of health care costs for retirees. He estimates that the average 65-year-old couple retiring now and enrolled in Original Medicare can expect to spend $315,000 on health care and medical expenses in their remaining years.

Fidelity’s estimate is based on a hypothetical scenario rather than actual spending data. A new study from Boston College’s Center for Retirement Research, based on real data, comes up with a much lower figure for out-of-pocket spending: $67,260, on average, for a 65-year-old couple who might use a variety of options for healthcare coverage.

The CRR study found that these out-of-pocket expenses account for about one-fifth of total retirement healthcare expenses. The rest is covered by Medicare (64%), Medicaid (10.7%) and other insurers (3.7%). Medicare is the federally run insurance program for people over 65 and generally requires patients to pay premiums and deductibles. Medicaid is a federal state assistance program for low-income patients of all ages run by state and local governments under federal guidelines, which generally covers all costs.

The CRR study is based on Medicare and Medicaid records as well as a long-running nationally representative health and retirement survey. This information was supplemented with data from insurers for people with Medicare Advantage plans, the other type of Medicare coverage with Original Medicare. Therefore, it covers a wider range of scenarios than Fidelity’s estimate and is based on actual spending by real people.

A drawback of the CRR study, however, is that its data sources only include information up to 2012. This means that they do not take into account the last decade of inflation or the evolution of health care trends.

For a direct comparison, in 2012 Fidelity estimated that her hypothetical couple would need $240,000 to cover medical expenses until retirement. This is still 3.5 times the CRR estimate.

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